Divided Fed considers numerical triggers for rates policy

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Published October 04, 2012

| Reuters

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WASHINGTON – The U.S. Federal Reserve may adopt numerical thresholds for inflation and joblessness that would serve as guideposts for policy, according to minutes from a September meeting that revealed some reticence about the central bank's latest stimulus.

The Fed last month launched a third round of large-scale bonds buys, announcing an open-ended program that kicks off with $40 billion per month of new mortgage debt purchases.

Minutes of the Sept. 12-13 meeting released on Thursday showed the Fed was broadly in agreement that more policy stimulus was needed given a meager economic recovery, which registered a paltry 1.3 percent annual rate of growth in the second quarter.

There was clear support for an approach favored by Chicago Federal Reserve Bank President Charles Evans, who has advocated allowing inflation to rise as high as 3 percent for as long as it takes to get the jobless rate below 7 percent.

But arriving at a consensus on what exact markers to use - and how to communicate the shift so as to replace the Fed's current guidance that rates will likely stay low until mid-2015 - remained a tricky task.

"Most participants agreed that the use of numerical thresholds could be useful in providing more clarity about the conditionality of the forward guidance but thought that further work would be needed to address the related communications challenges," the report said.

With the nation's unemployment rate at 8.1 percent and expected to have ticked even higher in September, the Fed made clear it will continue to ease policy until the jobs outlook improves substantially. It vowed to maintain stimulus as long as inflation is under control even after the recovery picks up steam.

While the policy does appear to have broad consensus within the Fed's influential core, particularly its Washington-based board of presidentially appointed governors, there was some unease expressed by some officials.

Inflation hawks at some of the Fed's regional banks are worried that further expansion of the central bank's balance sheet, which at $2.8 trillion is already more than triple its pre-crisis levels, will make it more difficult for the policy-setting committee to pull back when the time comes.

"Several participants reiterated their concern that additional purchases might complicate the committee's efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so, raising the risk of undesirably high inflation in the future and potentially unmooring inflation expectations," the minutes said.

Still, officials saw the risks to the inflation outlook as roughly balance and the Fed's forecasts suggest price growth will remain shy of the central bank's 2 percent target for the foreseeable future.